The Motley Fool Previous Page

Maggie Thatcher's Bull Market

Selwyn Parker
October 2, 2011

This article has been adapted from our sister site across the pond, Fool U.K.

You'd be hard put to find an optimistic investor in 1980, so bad was the British economy. Inflation and interest rates were going through the roof, unemployment was rising, and gloom lay all about.

Yet two years later, the FTSE was off on a bull run that would last into the noughties. So what happened to turn the tide? As today's markets alternate between blind panic and irrational relief, it's a highly pertinent question.

Gloom and revulsion
Let's start with the gloom. "For the great bear-market bottoms, you need a society-wide revulsion with equities," according to Russell Napier of CLSA brokerage and investment group, an authority on the subject. We certainly had that in 1980. Inflation in Britain was about to peak at a horrifying 20% and interest rates at 17%. Manufacturing was in the doldrums. What shares could you trust?

It was the same story in America, which had suffered double-digit inflation and double-digit interest rates for years. Reflecting that revulsion, the Dow hit rock bottom at 776.2 in early 1982, almost exactly where it had been 18 years earlier. Meanwhile, the FTSE All-Share index was struggling around the 250 mark.

Shocking numbers
The big figures in the economy probably affected ordinary investors, too. Although they may not know much about the ratio of the deficit to gross domestic product, these figures do hit the headlines and filter into the public consciousness. In the U.S., for example, the deficit was 6%, considered shocking at the time, although today it's in handsome double digits.

But then the headline numbers began to turn. By 1981 inflation had fallen to 12% in Britain and below 5% by January 1983. By then, the bull market was taking hold.

A boost from behind
Equity markets also got a kick in the backside. In America it was Ronald Reagan's tax cuts that provided what economists call an exogenous (external) boost, while in Britain it was a round of privatizations. The latter was a one-off that we won't see again, and it's hard to underestimate its influence.

Maggie's privatization program started from 1981 with the sale of half of Cable and Wireless. Thereafter, many of the jewels in the national crown -- 20% of the economy was in state hands -- were progressively opened up to investors. Because the privatizations were organized in a way that attracted the general public to buy shares in the companies, a whole new class of investors flooded into the stock markets. Cable and Wireless, for example, was oversubscribed by six times.

Delayed results
Macroeconomic policies also play a big role in an equities rally, but they're often invisible. By the time they're having the desired effect, everybody's forgotten exactly what the policy was. When, for instance, the Thatcher government incre